OT - Weak hands feed shrewd ones.-More
posted on
Feb 16, 2008 06:26PM
With mortgage, bonds and all types of derivatives if not being worthless then at least losing a large part of their value, what is a holder of this paper to do?
He can not off load this unto someone else because the news has hit the fan and there is no market for it. So he is stuck and sooner or later will have to write it off as a loss.
If it is a fund where the administrator of the fund is not invested in the fund then it is easy, he does not suffer any immediate loss, the fund clients do, tough luck for them. The fund managing institiution merely suffers a blow to their reputation and loses clients.
Entities that are holding the paper for themselves have a direct problem with writing a loss down. Some of the fund administrators are likely to get the axe and some even get the shaft as in criminal prosecution per most recent example in France. That just assigns blame, the problem still remains. To avoid bankruptcy some drastic measures need to be taken.
Most will hold some real or near real assets as in real estate, government bonds, stocks or even bullion. Some of that has to be let go to save the entity. What will it be?
Surely it will not be bullion with current price appreciation, that has to be the last resort. Safe bonds and similar certificates are just that Safe, so why part with them?
Real estate that is losing value by the hour is a prime candidate. Also stocks but these are so variable that some may be as valuable as bullion itself or better while on the other extreme there are some like derivative paper.
I will not dwell on real estate but on stocks.
With stocks you would get rid of all that are most risky and thus have least potential for apreciation. That would be some financials and unproven mining explorers in particular. Keep in mind that these entities have short term interests in mind - because bankruptcy is knocking on their door. These are distressed sales.
What mining stocks they will keep are those that are involved with desirable commodities in large quantity and with high liquidity - just in case they need to bail out quickly. Hence my explanation as to why large caps are doing much better and earlier than small and why bullion is leading. But with bullion, there is only so much to go around, great for the initial phase but not sustainable ( million $/ounce Au is out of the question).
Yes small PM caps that are holding great resources will eventually supercede the large ones but only after everyone loads up on the "safer" bullion and large PM stocks, then they will look for the ones with highest potential profit, the small caps.
Those that are not distressed are looking and aquiring quality in quantity.
Are you buying the basher story? If so, then you are like one of the 'distressed' and handing over quality.